US economy is cooling; Japan may recover gradually in 2H24; China’s economy still fragile despite slower contraction in real estate sector
US
Trump has a higher chance of winning the election. US economic numbers continue to slow down. In June, the ISM Manufacturing PMI slipped to a 4-month low of 48.5, while the Services PMI turned contraction at 48.8, its lowest since May 2020. The employment front also slowed, with growth in non-farm payrolls down from 218,000 to 206,000, the unemployment rate rising to 4.1%, and growth of average hourly earnings decelerating to 3.9% YoY from 4.1% a month earlier.
Following President Biden’s poor performance in the presidential debate, it has become more likely that the Republican Donald Trump will win in November’s election. This is adding to uncertainty over the outlook for economic and monetary policy in 2025, especially with regard to possible hikes in tariffs on imports from China and other countries. Evidence of an economic slowdown is also increasingly showing up in indicators including: (i) softening housing markets; (ii) the rise in the unemployment rate to its highest since October 2021; and (iii) weakening household consumption and consumer sentiment. This will help to restrain price rises, aligning with the Fed Chair’s remark of ‘disinflation path’. So, we continue to expect two rate cuts this year, with Fed Funds rate ending 2024 at 4.75-5.00%.
Japan
In Japan, economic indicators show recovery extending through 2H24. Despite household spending flipping from growth of 0.5% YoY to a -1.8% contraction in May, the Q2 Tankan survey of business confidence index in large manufacturing sector increased from 11 in the previous quarter to 13, and the index in service industries fell only slightly from 34 to 33.
Evidence of short-term weakness in the Japanese economy can be seen in: (i) the decline in Q1 GDP; (ii) the biggest fall in household spending in 4 months; and (iii) the drop in the job openings to applicants ratio to a 2-year low. However, the positive impacts of of higher wages, strengthening exports, and rising sentiment among major corporations, all will support the economic recovery through 2H24. Against this backdrop, we expect that at its 30 July meeting, the Bank of Japan (BOJ) will raise the policy rate by 10-15 bps to 0.20-0.25%. In addition, the BOJ is expected to announce a plan for unwinding of quantitative easing that will trim bond purchases by some JPY 16.1tn (USD 99.7bn) in its first year of implementation.
China
China’s real estate slump is slowing but manufacturing remains fragile and is at risk from rising trade tensions. At 49.5, June’s official NBS Manufacturing PMI stayed below 50 for the 2nd month, partly on weakness in new export orders (at 48.3). The PMI for consumer goods turned contraction (49.5 in June vs 50.5 in May), but that for hi-tech goods continued to expand for the 13th month (52.3 vs 50.7). The private sector (Caixin) showed an almost flat Manufacturing PMI (51.7 vs 51.8). For Non-Manufacturing PMI, the slowing growth was reported by both the official source (50.4 vs 51.1) and private sector (51.2 vs 54). In the real estate sector, house sales by 100 largest developers fell for the 13th straight month in June, but the contraction is slowing from -45% YoY in April to -33.6% in May and -17% in June.
Recent PMIs still show an uneven and fragile recovery in manufacturing sector. Although services sector continues to grow and the real estate sector is expected to improve in 2H24, 3Q24 GDP is likely to grow slower than 2Q24 due to weak domestic consumption, excess supply in manufacturing, and the impact of new EU and US tariffs, particularly on EVs. These tariffs take effect on July 5 and August 1, respectively, and are significant to some degree as 39.4% of Chinese EV exports went to the EU in 2023.
Inflation eased below the official target while BOT signals to maintain policy rate. Income from foreign tourism back to 90% of pre-Covid level.
Despite easing headline inflation in June, the MPC is expected to hold policy rate steady the rest of 2024. Headline inflation cooled from 1.54% YoY in May to 0.62% in June thanks to the ending of changes to electricity prices and baseline effects in May, and the onset of more favorable weather that has fed into a drop in prices for fresh food. Core inflation, which excluded raw food and energy prices, eased slightly from 0.39% to 0.36%. For 1H24, headline and core inflation rates have averaged 0% and 0.41%, respectively.
Having briefly returned to the target range for the first time in 13 months in May, headline inflation dropped back under the target in June. We see inflation gradually rising through 2H24, and this may enter the 1-3% target in 4Q24. For the whole of 2024, headline inflation is expected to average just 0.7%. Price rises are being undercut by: (i) the normalization of prices and yields of agricultural goods now that the period of excessively hot weather is over; (ii) assistance with household electricity bills, part of government measures to help with the cost of living; and (iii) slow economic recovery and weak demand, as reflected in still-low core inflation. However, external factors, including the uncertain geopolitical outlook, may push up oil prices and freight charges, which would then add to the cost of imports.
For the policy rate outlook, the BOT governor has acknowledged that the economy is growing only slowly, but it is returning to its growth potential. He added that the current level of interest rates is appropriate based on the BOT’s “outlook dependent” approach. The BOT has also expressed its concerns over the structural problems in the manufacturing sector, intensifying competition from overseas players, and persistent high levels of household debt. In light of this and a possible increase in inflation going forward, we expect that the Monetary Policy Committee (MPC) will leave the policy rate unchanged at 2.50% for all of 2024.
17.5m foreign arrivals were recorded in 1H24, and we still expect total 2024 arrivals to reach 35.6m. The Economics Tourism and Sports Division reports that in June, the country welcomed 2.74m foreign tourists, up 22.3% YoY and an increase on May’s 2.63m. This thus brings the 1H24 total to 17.5m, or an increase of 35.5%. Through the period, the 5 most important originating nations were China (3.44m tourists), Malaysia (2.44m), India (1.04m), South Korea (0.93m) and Russia (0.92m).
The tourism sector remains one of the primary drivers of growth. The Thai economy has benefited from the fact that in 1H24, arrivals returned to 88.5% of their 1H19 pre-Covid total. Moreover, although China was the largest source of arrivals, the Chinese market is still only at 61% of its 1H19 size. Malaysian, Indian, South Korean and Russian arrivals are now between 103% and 126% of their levels in 1H19. In the first half of the year, income from overseas tourism totaled THB 825.54bn, or 91% of the 1H19 total, up from 2023’s 63%. Through the latter half of the year, the extension of visa-free travel to a total of 93 countries, the increase in the permitted stay from 30 to 60 days, and the expansion in the number and frequency of flights linking Thailand to major markets (e.g., India) all will continue to boost the sector. We therefore expect that across all of 2024, 35.6m arrivals will be recorded. Beyond this, the government has also decided to end duty-free shopping for inbound travelers arriving at Thai airports, thus encouraging these to spend and consume more widely once they are in the country.
